Ganging up on Groupon

Credit: Source: Fred Prouser / Reuters

Online deal of the day company's IPO getting skeptical reviews

When Groupon filed to go public last Thursday, the "deal of the day" website's IPO was given pretty straight coverage, with a little bit of "social media bubble" glitz thrown in.

Since then, though, many investment analysts have had time to drill down into Groupon's S-1 filing, and have come away with some troubling conclusions.

Troubling Conclusion No. 1: Charlie Sheen is secretly calling all the shots at Groupon!

I kid the readers. Actually, Groupon still is run by CEO Andrew Mason (more on that later), but as Kevin Kelleher writes over at CNNMoney.com, "Groupon is approaching the markets with an operating loss equal to 18% of revenue."

(Also see: Groupon to go public)

It's actually worse if you look at "net revenue," which is another way of saying "revenue," at least for Groupon's purposes. Groupon, of course, splits its revenue with the businesses that offer deals through the Chicago-based company.

Groupon's net loss in the three months ended March 31 was $113.9 million. It had gross revenue of $644.72 million, which is the figure Kelleher uses, but it had $374.73 million in "cost of revenue," which represents (primarily) "agreed-upon payments to the merchants."

So Groupon's gross profit is $270,000. Measured against that, Groupon's Q1 net loss is equal to 42 percent of revenue.

Troubling Conclusion No. 2: Groupon is spending too heavily on attaining new customers and can't keep up this pace.

Groupon certainly doesn't shy from discussing its heavy spending in the IPO prospectus, listing among its "risk factors":

"...we expect our operating expenses to increase significantly in the foreseeable future"...

and "...if we are unable to recover subscriber acquisition costs with revenue and gross profit generated from those subscribers, our business and operating results will be harmed."

The company says it "spent $179.9 million on online marketing initiatives relating to subscriber acquisition for the first quarter of 2011." That's a lot of money relative to gross profit. It's also a huge jump: Groupon spent $241.5 million on subscriber acquisition in all of 2010!

Here's how financial blogger Conor Sen described Groupon over at Minyanville: "It's operating like a Ponzi scheme that needs constant infusions of cash to stay afloat as it's hemorrhaging money."

Troubling Conclusion No. 3: Groupon is heavily in debt.

The company reports it has that an accumulated deficit of $522.1 million as of March 31. Running a net loss while spending hundreds of millions on subscriber acquisition will only make the deficit worse. And Groupon doesn't have a Medicare program to eliminate.

Troubling Conclusion No. 4: How committed is CEO Andrew Mason?

CNNMoney.com's Kelleher thinks Mason's "unsettling, plaintive" letter to potential stockholders at the beginning of the prospectus strongly hints at a lack of zeal on the part of Groupon's founder to see this whole thing through.

Kelleher writes that Mason's letter reads "as if he were trying to figure out how he went from trying to change the world to being the public face of a glorified coupon site."

No doubt, the letter is weird. I thought so when I read it Thursday. But I'm not as certain it's an indication Mason already wants out. It struck me more as a callow effort to tout the company's "we're different" ethos. Kelleher certainly is correct in observing that investors don't care.

Troubling conclusion No. 5: Groupon might be hitting a sales ceiling.

U.K.'s Real Business points out, "An analysis of the company's revenue figures reveals that after two years of uninterrupted growth, there was a blip in February this year, when sales fell from $90m to $61m."

I couldn't find that information in the prospectus (it's 248 pages long), but assuming that's true, it may be a sign that Groupon's hypergrowth days are over. Combine that with heavy net losses and liabilities, and the excitement over this social media IPO could diminish sharply by the time it debuts on Nasdaq.

But don't worry. The current shareholders and the underwriters' favored friends on Wall Street will make out fine, which is always the point of an IPO. The rest of us would do well to curb our enthusiasm on launch day.

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